in a sample of 37 employee stock ownership plan (ESOP) companies. The results ..... ployee benefit, (b) employee incentive, (c) financial and tax purposes,.
Copyright 1988 by Ihe American Psychological Association, Inc. 0021-90IO/88/$00.75
Journal of Applied Psychology 1988, Vol. 73, No. 4,630-638
Correlates of Employee Satisfaction With Stock Ownership: Who Likes an ESOP Most? Katharine J. Klein and Rosalie J. Hall University of Maryland, College Park In this study, we examined the correlates of individual employee satisfaction with stock ownership in a sample of 37 employee stock ownership plan (ESOP) companies. The results indicated that ESOP satisfaction is a function of five factors: (a) characteristics of the company ESOP, (b) employee status within the ESOP, (c) employee values, (d) interactions between employee and ESOP characteristics, and (e) employees' general attitude toward the organization as a whole (organizational commitment). Together, these five factors accounted for 58% of the variance in ESOP satisfaction. The results both support and extend previous employee stock ownership research and theory.
Despite increasing research attention (e.g., Conte & Tannenbaurn, 1978; French & Rosenstein, 1984; Hammer & Stern, 1980; Hochner & Granrose, 1985; Klein, 1987; Long, 1978; Rosen, Klein, & Young, 1986), important questions about the nature and determinants of employee attitudes toward stock ownership remain unanswered. Are all employees equally satisfied with stock ownership? If not, which factors distinguish the more satisfied from the less satisfied employees? How much do company-level factors explain differences in employee satisfaction with stock ownership? Are more highly paid employees more satisfied with stock ownership than lower paid employees? Are more educated employees more satisfied with ownership than less educated employees? To answer these questions, we proposed and tested a model of individual employee satisfaction with stock ownership. Before describing this model, we provide a brief introduction to employee stock ownership plans (ESOPs).
company or, in some companies, only when they reach retirement age. Employees in publicly held companies must be allowed to vote their stock. Privately held companies are not legally required to grant employees general stock voting rights. Companies establish ESOPs for different reasons. Many establish an ESOP for the tax savings that ESOPs offer. In addition, ESOPs can be used to fulfill management's commitment to employee participation, to increase employee commitment and productivity, to raise capital, to transfer ownership from a company founder to employees, to onset wage concessions, to avert a plant shutdown, or to transfer from public to private ownership. ESOP companies are, thus, a diverse lot. Most, however, are relatively small (500 or fewer employees), privately held, and financially successful (Marsh & McAllister, 1981; Rosen&Klein, 1983; Rosen etal., 1986). Worker buyouts to avoid plant shutdowns receive substantial popular media attention (e.g., Labich, 1983), but in fact they account for only 4% or less of all ESOPs (General Accounting Office, 1986; Rosen et al,, 1986). (For more detailed descriptions of ESOPs, see Kaplan & Ludwig, 1985; Rosen et al., 1986; and Weyher & Knott, 1985.)
Employee Stock Ownership Plans ESOPs have been adopted by more than 8,000 firms nationwide (Rosen et al., 1986). Fundamentally, an ESOP is a mechanism by which management gives employees stock. Employees do not buy the stock in the ESOP, nor do they typically forfeit wages in exchange for stock. In an ESOP company, the company annually donates stock, or cash to buy stock, to an ESOP trust. Stock held in the trust is allocated to individual employees on the basis of employee salary. All company employees are typically included in the plan after a year of service with the company. Through vesting, employees earn a gradually increasing right to their ESOP stock. Employees receive their vested shares when they leave the
Predictors of Individual ESOP Satisfaction The employee ownership literature suggests that employee ESOP satisfaction depends on the extent to which the ESOP meets employee needs and expectations for financial gain, influence in company decision making, and a sense of greater involvement in the company (French, 1987; Klein, 1987; Long, 1979; Tannenbaum, 1983). We hypothesize that the meeting of these expectations, in turn, depends on five factors; (a) characteristics of the company ESOP, (b) employee status within, and understanding of, the ESOP, (c) employee values, (d) interactions between employee and ESOP characteristics, and (e) halo, the employee's general attitude toward the organization as a whole. ESOP characteristics. Klein's (1987) research documented the importance of both the financial benefits of the ESOP and management's employee ownership policies and practices in explaining between-company differences in average employee satisfaction with the ESOP. In company-level analyses, mean ESOP satisfaction was highest in companies in which (a) the
We thank Irv Goldstein, Paul Hanges, Doug Jenkins, Joan Rentsch, Corey Rosen, Janice Rouifler, Ben Schneider, and David Schoorman for their helpful and insightful comments on earlier drafts of this article. Rosalie J. Hall is now at the University of Akron, Ohio. Correspondence concerning this article should be addressed to Katherine J. Klein, Department of Psychology, University of Maryland, College Park, Maryland 20742.
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company made relatively large annual contributions to the ESOP, (b) management was highly committed to employee ownership, and (c) company communications about the ESOP were extensive. (Mean ESOP satisfaction was not significantly related to the percentage of company stock owned by employees, the return on company stock, the reason the company established its ESOP, or the provision of employee stock voting rights.) Insofar as several of the ESOP characteristics significantly predict between-company differences in average ESOP satisfaction, they are also likely to predict between-company differences in individual employee ESOP satisfaction. Thus, we retested—at the individual rather than the company level of analysis—the effects of the ESOP characteristics tested in Klein (1987). In addition, we included two other ESOP characteristics that may also influence individual ESOP satisfaction: the age of the ESOP and whether the company gives employees their vested ESOP stock whenever they leave the company or only at retirement. These two variables affect the size of the employee's account (ESOP accounts are uniformly small if the ESOP is a new plan) and the delay before the account is actually available to the employee, respectively. ESOP characteristics are relatively gross predictors of individual ESOP satisfaction; they vary only between, not within, companies. Nonetheless, they are fundamental for understanding individual ESOP satisfaction because they effectively set limits on the ESOP's capacity to satisfy individual employees. If, for example, the company contribution to the ESOP is very small, then even the most highly paid employees will have small ESOP accounts. (Other things being equal, a $100,000-a-year executive in a company contributing 1% of payroll to the ESOP will own less stock than a $10,000-a-year janitor in a company contributing 15% of payroll to the ESOP.) Similarly, if a company does little to publicize its ESOP, employees in the company will lack awareness and understanding of the plan, compared with employees in firms with more active ESOP communication programs. Individual characteristics: Employee status within, and understanding of, the plan. Within the parameters set by ESOP characteristics, individual-level variables may explain withincompany variance in ESOP satisfaction. One key individuallevel factor is an individual employee's financial status within the plan. That is, an employee's ESOP satisfaction may reflect how much money he or she has personally earned through the employee ownership plan. This hypothesis is consistent with previous employee ownership research (French & Rosenstein, 1984; Hochner & Granrose, 1985; Klein, 1987; Rosen et al., 1986) and with research on pay and other benefit plans that documents the positive correlation between the size of the benefit and employee satisfaction with that benefit (Berger & Schwab, 1980; Heneman, 1984;Lawler, 1971, 1981; Schwab & Wallace, 1974). An individual's financial status in the ESOP is determined by salary, tenure, and vesting. Salary is an important determinant because stock is typically awarded in proportion to employee salary. Tenure also affects the size of an employee's ESOP account because the total amount of stock held in an employee's ESOP account grows with every annual company contribution to the ESOP. Finally, vesting influences an individual's financial status in the ESOP insofar as employees typically have only a
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partial claim to the stock in their ESOP accounts until they have been employed by the company for several years. We thus hypothesize that ESOP satisfaction is positively related to employee salary, tenure, and vesting. (Employee tenure and the degree to which an employee's ESOP account is vested are closely related but not identical variables because of the variety of vesting schedules used in different ESOP companies; Rosen etal., 1986.) Our discussion of the probable impact of ESOP characteristics and individual ESOP status on ESOP satisfaction assumes that employees have a basic understanding and appreciation of the plan. However, employee understanding and appreciation of the ESOP may vary with employee education and age. As ESOPs are complicated legal plans, employees with more education may have a better understanding of, and thus a greater appreciation of, the ESOP than do less educated employees. As ESOPs are deferred benefit plans that offer few if any immediate rewards, older employees—who are more likely to appreciate the need for a retirement nest egg and who are more likely to actually receive their ESOP stock relatively soon—may be more satisfied with the ESOP than are younger employees. Employee age and education should thus be positively correlated with ESOP satisfaction. Employee values. Some employees may expect more than just financial gain from participation in the ESOP; they may expect to gain a voice in company decision making as well (Ellerman, 1984; French, 1987). Previous research, however, suggests that employees who expect to gain influence through an ESOP may be disappointed. Only 10%-15% of privately held ESOP companies allow their employee stockholders to vote their stock, and in publicly held companies, employees rarely own a large enough portion of company stock to influence company decision making (Rosen et al., 1986). Further, ESOP participants typically report that stock ownership does not increase their influence in the company (Rosen et al., 1986). Therefore, we hypothesize that the strength of an employee's desired influence in the company will be negatively related to ESOP satisfaction. Interactions between employee and ESOP characteristics. Thus far, we have suggested that both ESOP and employee characteristics may shape employee satisfaction with stock ownership. These factors may interact, however, with ESOP characteristics moderating the relation between employee characteristics and ESOP satisfaction. For example, the relations between ESOP satisfaction and employee salary, tenure, and vesting may be moderated by company-level factors that limit the value of the ESOP for all participants, regardless of their financial standing in the plan. ESOP accounts are likely to be universally small if (a) the ESOP is a new plan, (b) the company contribution to the ESOP is small, or (c) company stock has performed poorly. Thus, we predict that the relations between ESOP satisfaction and employee salary, tenure, and vesting will be weaker in companies in which any of these conditions prevail. In a similar vein, the correlations between ESOP satisfaction and employee education and age may be attenuated by company-level factors that lessen the importance of education and age for employee understanding and appreciation of the ESOP. For example, in companies that maintain extensive ESOP communications programs (e.g., company newsletters about the ESOP, annual employee shareholder meetings), all of the em-
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ployees may more fully understand the ESOP and education may thus be a less powerful determinant of ESOP satisfaction. Employee age may be a relatively strong determinant of ESOP satisfaction in companies that require employees to wait until they reach retirement age to receive their vested ESOP shares and a relatively weak determinant in companies that simply give employees their vested shares when they leave the company. Finally, the hypothesized negative relation between desired employee influence in the company and ESOP satisfaction may be moderated by ESOP characteristics that increase employee influence in company decision making. If the ESOP appears to increase employee influence, then employees who desire such influence in the company are less likely to be disappointed. In accordance with Klein's (1987) research, therefore, the negative relation between desired influence and ESOP satisfaction should be weaker in companies in which (a) participants are granted voting rights, (b) management is highly committed to employee ownership, and (c) the ESOP communications program is very active. Halo: General attitude toward the organization. The last factor that may influence employee satisfaction with the ESOP is halo: Does the employee tend to view the organization as a whole in a positive or negative light? Because an ESOP may not be a highly salient aspect of the individual's daily experience of the organization, the employee's general attitude about the company may color his or her specific assessment of the plan. If the employee is highly satisfied with the company, he or she may view the ESOP as one more indication of the merits of the organization. Conversely, if an employee is highly dissatisfied with the company, he or she may view the ESOP as an example of a self-serving management ploy. Therefore, we hypothesize that the more positive an employee's view of the organization is, the higher the employee's satisfaction with the ESOP will be.
Summary of Hypotheses Our model suggests that individual ESOP satisfaction is a function of five sets of variables, summarized in the hypotheses listed below: Hypothesis 1. ESOP characteristics (percentage of company stock owned by the ESOP, size of the company contribution to the ESOP, stock return, ESOP voting rights, management's employee ownership philosophy, ESOP communications, ESOP reason, ESOP age, and ESOP stock distribution schedule) are positively related to individual ESOP satisfaction. Hypothesis 2. Employee characteristics related to employee status in and understanding of the ESOP (salary, tenure, vesting, education, and age) are positively related to individual ESOP satisfaction. Hypothesis 3. Desired influence in company decision making is negatively related to individual ESOP satisfaction. Hypothesis 4. Interactions between individual characteristics and ESOP characteristics (salary, tenure, and vesting by ESOP age, ESOP contribution, and stock return; education by ESOP communications; age by ESOP distribution schedule; desired influence by voting rights, management's employee ownership philosophy, and ESOP communications) are related to individual ESOP satisfaction.
Hypothesis 5. General attitude toward the company is positively related to ESOP satisfaction. In addition, a sixth hypothesis is implicit in Hypotheses 1-5 and throughout our discussion: Hypothesis 6. In a hierarchical regression analysis, each successive set of predictors identified in Hypotheses 1-5 adds a significant increment to the explained variance in ESOP satisfaction. Method Participants Data analyses are based on the responses of 2,804 ESOP participants in 37 companies. The data were collected between May 1982 and November 1984 under the auspices of the National Center for Employee Ownership. The companies ranged in size from 15 to 7,080 employees. The sample is described in greater detail in Rosen et al. (1986) and Klein (1987).
Procedures Surveys measuring employee characteristics (e.g., salary and age) and attitudes (e.g., ESOP satisfaction and organizational commitment) were distributed to all of the company employees or, in companies with more than 400 employees, to a random sample of employees. The average employee response rate was 55.13% (SD = 17.15). Company sample size ranged from 10 to 268 employees (M = 75.43, SD = 64.75). In addition, a key managerial respondent (the chief executive officer, vice president, or personnel director) in each company was interviewed for background information about the company and the ESOP.
ESOP Characteristics The percentage of company stock owned by the ESOP was the number of shares owned by the ESOP divided by the total number of company shares in circulation at the time of the survey (M = 42.33%, 50 = 33.11%). The size of the company contribution to the ESOP was the average amount of cash or stock the company contributed to the ESOP trust in the 3 years preceding the employee survey. The measure is expressed as a percentage of covered employee payroll (M = 9.46%, SD = 6.28%). Contribution data are missing for two companies. Company stock return was the percentage change in the market or appraised value of company stock during the 2-year period preceding the employee survey (M = 37.05%, SD = 81.25%). (None of the companies distributed dividends.) Stock return data are missing for four companies. Companies that gave employees full voting rights (based upon their stock ownership) were coded 1 (n = 13), whereas companies that did not give full voting rights were coded 0 (n = 24). The company's employee ownership philosophy score was the mean response to three items (e.g., "Employee ownership is a central part of our management philosophy"). Response categories ranged from strongly disagree ( 1 ) to strongly agree (7). The scale reliability was .83 (M = 5.19, SD = 1.48). Employee ownership philosophy data are missing for three companies. The managerial respondent was asked to indicate the single, primary reason the ESOP was established from a list of seven reasons: (a) employee benefit, (b) employee incentive, (c) financial and tax purposes, (d) philosophical commitment, (e) avoiding a shutdown, (f) business transfer from existing shareholder(s) to employees, and (g) purchase of the company during a corporate divestiture. (These responses were dummy coded for the regression analyses.) The top three responses were philosophical commitment (n = 9), employee benefit (n - 8), and busi-
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Table 1 Correlations Among ESOP Characteristics 1
2
3
4
5
6
-.13 .02 .15 .17 -.28 -.19 -.05 .67**
— .47** .33 .05 .26 -.19 -.28 .35
— .53** .06 .27 -.08 .02 .62*
— .01 .24 -.03 -.27 .42
— -.08 -.33* .06 .46
— .28 -.12 .39
Variable
1. 2. 3. 4. 5.
6. 7. 8. 9.
Percentage Voting Philosophy Communications Contribution Stock return ESOP age Distribution ESOP reason
7
8
9
— -.14 .15
— .21
—
Note. These analyses are at the company level of analysis. Maximum N — 37. ESOP reason relations are described using eta. ESOP = employee stock ownership plan. *p
